Born from the Ashes of Crisis

It was the mid-1980s, and The Graham Company was going through a scare. The market for errors and omissions coverage had evaporated.

Carriers offered only minimal coverage—if any—to all but the larger, national houses, leaving middle-market brokers to hope for the best.

“We were in a very hard insurance market, and there was absolutely no one that would write errors and omissions coverage for an insurance agent or broker,” says Bill Graham, CEO of The Graham Company. “It was virtually impossible to get a return phone call, let alone get a quote.

“We were fortunate. We only had a few months where we didn’t have coverage, but it scares the heck out of you and you realize that if you didn’t get coverage it could put you out of business overnight. Thank goodness we have never had a serious claim that could have put us out of business, but that’s more a matter of luck than anything else. Many firms had to merge into larger brokerages to protect themselves.”

In 1986, The Council of Insurance Agents & Brokers, Assurex Global and Fireman’s Fund (now Allianz Global Corporate & Specialty) decided to create a captive insurer that could provide missing E&O coverage for independently owned middle-market agencies and brokerages.

That captive, Professional Agencies Reinsurance Ltd., or PAR as it’s known, has become an E&O market leader. Last year The Bermuda Captive Conference named PAR to its Captive Hall of Fame.

Skip Counselman, chairman and CEO of RCM&D, who is active in Assurex, was one of the early leaders in the effort to find a solution.

“We changed the market because we felt that our loss experience was very favorable,” Counselman says. “We were not having the kinds of losses the national brokers were experiencing. We felt pretty confident in starting our own reinsurance program and assuming risk and owning the company if we maintained the standards we had in place. In the first five years, we were almost claim free. So we were collecting a lot of premium and were not having to pay many losses.”

Council president and CEO Ken Crerar remembers that time well. It started with a discussion in the bar at the Greenbrier Resort at The Council’s annual fall Insurance Leadership Forum. Several members were lamenting having trouble securing E&O insurance.

“The genesis was at our meeting,” Crerar says. “Skip’s dad was in the bar and talked about pulling it together. Captives were something new at the time. It eventually became an Assurex-Council program. We helped reach out to the carriers, Assurex managed it and Fireman’s Fund stepped up to the plate to insure it.”

The initial discussions at the Greenbrier took place about two years before the captive went live, Crerar says. But a little more than a year later, when they decided to move forward, they acted quickly. “That’s one of the beauties of this meeting,” Crerar says. “They talked, and everything came together.”

It worked, he says, because “brokers got together and set a standard of how they were going to do their business. They shared the risk together. It’s a good example of a program that has really worked well for its insureds.”

Today, PAR serves as an ownership and investment vehicle for policyholders of E&O Plus, its errors and omissions product. It recently added an E&O coverage extension for cyber risk.

“You really can’t put it on auto-pilot, because you do have to keep refreshing,” says Stan Loar, PAR director and board chairman of Woodruff-Sawyer & Co. “Going forward, we’ve got to continue to up our game in quality management and bring in cutting-edge systems, procedures and concepts.”

E&O Plus is available to independent middle-market agents and brokers who are willing to invest in an ownership position in PAR Ltd. and meet stringent quality management standards intended to keep claims down. Thanks to such measures, the captive has returned a dividend to its investors almost every year since its inception.

E&O cover today is now more widely available than it was in the 1980s and 1990s, but many of the early PAR investors recall life before the captive as a scary time.

Tim Wiechers, senior vice president of finance and operations at Assurex Global, which administers PAR, says the lack of coverage threatened to put a lot of agents and brokers out of business.

“I think you can equate it to the early ’80s,” Wiechers says, “when we had the same issue in the medical malpractice area and you had physicians and hospitals that couldn’t buy the coverage and, therefore, there was a threat to even being able to do their surgeries or their services. The same thing was happening on the agency side. That just puts an onus on your own financial well-being, let alone how you can service your clients if you can’t buy it.”

“I think it came in the nick of time,” says Jim Hackbarth, CEO at Assurex Global. “It was unheard of that you could put together a captive in that short a period of time. I think that was driven out of necessity and urgency, which is not always the case in setting up a captive. Typically, it would take a couple of years to get all the insurers lined up and to get all of the capital lined up. To do a captive within six months is a reflection of the urgency that something had to be done.”

The backbone of E&O Plus is a stringent quality management program. Key elements include:

• Strict Eligibility. Potential investors must undergo a thorough underwriting vetting.
• Quality Management Implementation. All insured firms must designate a quality-management manager and implement the PAR quality-management program on an agreed-to schedule.
• Annual Quality Management Conference. Each insured firm’s quality-management manager must attend and participate in PAR’s annual quality-management conference.
• Annual On-Site Audit. PAR conducts an annual, in-person, on-site review of all offices and operations of each participating firm to ensure compliance.

“We think our loss data is better than the industry’s because of this program,” Counselman says. “We think that’s really the most important part of this program. We’re all about quality client service and not making mistakes. If there’s a mistake, we want to find it and fix it.

“We can’t let just anybody into this program, and once they are in, we have to watch them and make sure they continue to enhance their standards.”

So what’s most likely to create an E&O problem? Loar says today’s active M&A marketplace raises concerns.

“We’re really concerned when an agency is all about just M&A,” Loar says. “That doesn’t mean we wouldn’t want it, but we want to make sure they have those systems, because we see claims coming out of those. They buy this agency that I’ll call a rogue agency—maybe the agency wasn’t well organized when the claim occurred. People buy agencies, and they don’t always know what they are getting. They don’t necessarily do the right kind of due diligence. We’re really trying to help them protect risk by helping them understand they are getting an agency that has issues. Or they may be getting an employee who has issues and we need to help them.”

Wiechers says policy checking is another problem area.

“Policy checking is an important task, but it typically gets pushed back and sits on somebody’s desk for a long time because it’s a menial task,” Wiechers says. “You can imagine; it’s tedious because you’re comparing one policy from one year to another policy from another year.

You are comparing to make sure the policy coverages and the terms and conditions are the same as to what you just ordered at renewal.”

Richard Blades, Wortham CEO and a PAR board member, says Wortham’s experience with PAR has been beneficial.

“PAR has been extremely valuable to Wortham over the years because it’s been the cornerstone of our insurance program,” Blades says. “We’ve got a tremendous value out of that from the quality management program assisting us in avoiding errors in claims. I’m very proud of the fact that our firm hasn’t had an E&O claim exceeding our deductible in more than 10 years. It’s an accomplishment by having an attention to detail implementing the right procedures.

“Having a strong quality management program is going to make you more efficient and actually help you retain clients as well as produce new opportunities. Having PAR as the cornerstone of our E&O program adds more value than just the risk transfer of the E&O insurance coverage. It’s also the ability to receive that fairly consistent dividend.”

Each PAR participant receives a 145-page quality management guide with recommendations and suggested procedures. And while Counselman won’t reveal details, Crerar says the basics are simple. “The firm audit walks you through what kind of processes you should have in place to protect your client so the client knows what they are getting and what the coverage is,” he says. This culture, he explains, then “spreads through the whole organization. That’s what quality management is all about.”

In other words, PAR excellence.